The rise of the unregulated online gambling industry

The recent phenomenon of the cryptocurrency revolution has created a sea-change in how society views money. The online gambling industry is not immune to this transition, with a surge in the number of operators facilitating digital currency as a means to deposit, stake, and withdraw funds. However, with governments and legislators yet to agree on a universal definition for Bitcoin and its Alt-coin alternatives, many of these operators do not fall within the remit of domestic gambling regulations. What factors motivate players to utilise the services of an unregulated cryptocurrency casino, rather than with those who are licenced and bound by home-land legislation?

Should the anti-money laundering (AML) community be concerned at the prevalence of such services, and their open lack of regard to customer due diligence (CDD) controls?

The cryptographic ideology

Satoshi Nakamoto, the infamous pseudonym behind Bitcoin’s creation in 2009, dreamt of a world that could facilitate trade without requiring the services of an intermediary. Instead, transactions are verified and validated by the use of a cryptographic framework known as the blockchain. In layman terms, individuals known as ‘miners’ use their excess computing power to find solutions to algorithmic problems, which as a result, has the capacity to confirm a movement of funds without the use of a third-party.

Furthermore, because the blockchain ledger is publically viewable, each and every transaction can be audited in an open and transparent manner. In effect, although more pseudonymous than anonymous, parties engaging in a cryptocurrency transaction do not need to reveal their true identity, rather a string of alphanumeric characters is used to determine the sender and receiver.

These simple characteristics of the cryptocurrency framework have transformed the player-to-casino relationship, which has subsequently lead to an increase in online operators looking to join the revolution.

Cryptocurrency casinos

Online casinos specialising in cryptocurrency deposits promote their services using the aforementioned characteristics as benefits. Incentivising an anonymous gambling experience with no requirements for players to identify themselves has opened up the potential for several regulatory issues, such as age verification, AML and terrorist financing controls, and violation of territory restrictions such as servicing US citizens. Moreover, with operators often obscuring the location of the jurisdiction they are residing in, it remains to be seen who should take responsibility in policing such entities.

Cryptocurrency innovators have also created further technological possibilities by generating an anonymous peer-to-peer marketplace based on Ethereum smart contracts. Essentially, smart contracts allow for an open source, decentralised network to facilitate a bet between two players, without requiring a gambling operator to hold the funds. Due to its fully-automated, pre-defined ‘if/when’ framework, users can receive their subsequent winnings straight to their digital wallet, bypassing standard industry regulatory checks.

The size of the industry

A recent study by Fanusie and Robinson (2018) analysed Bitcoin inputs and outputs between 2013 and 2017, and although it was argued that less than 1% of usage was related to money laundering activity, gambling services constituted 25.79% of the identified illicit filtering.. The same authors also noted that of all identified illicit Bitcoin servicing, 52.03% were operating in an unknown location, illustrating the issues of national responsibility. These statistics are further amplified by Bitcoin Strip, who claim that 3,750,898 Bitcoins were wagered on gambling websites between April 2015 and 2017

Figure 1: Bitcoin Strip (2017) statistics displaying the total amount of Bitcoins wagered between April 2015 and 2017.

This appetite for cryptocurrency gambling has resulted in a plethora of new operators entering the market, many of whom are publically funded by an initial coin offering (ICO). Some examples of this include DAO.Casino, Edgeless Casino and vDice, who raised $12 million, $2 million and $1.8 million in their respective ICO’s. Furthermore, Bitcoin casino SatoshiDice was sold to a private investor in 2013 for $11.47 million.

Should the AML community be concerned?

Under UK legislation, the online gambling industry is primarily governed by the Money Laundering Regulations 2017, which was implemented in response to the EU Fourth Money Laundering Directive. The regulations stress that all new players must be identified, most commonly by providing government-issued identification and proof of address. However, monitoring suspicious activity is an ongoing requirement, as is the performance of enhanced CDD for those deemed high risk. Furthermore, under the Proceeds of Crime Act 2002 (POCA), the UK’s primary AML framework, online operators are obliged to submit Suspicious Activity Report’s (SARs) to its national financial intelligence unit in the event of knowledge, or suspicion, of money laundering activity. In response to the growing use of cryptocurrency for gambling activities, the UK’s Gambling Commission (2016) issued guidance, explaining that:

Any gambling business wishing to offer gambling facilities to consumers in Great Britain using digital currencies, or virtual currencies that can be exchanged for cash or traded for items of value, must hold an operating license.

Subsequently, the above legislation, regulations and licencing conditions are rendered ineffective, not least because of the borderless and pseudonymous nature of the cryptographic framework. Additionally, it could be argued that cryptocurrency casinos would lose their unique selling point if it was in the business of identifying its players.

Is there a solution for national regulators?

Jurisdictions such as the US have installed guidance with respect to cryptocurrency regulation, whereby exchangers – who form the bridge between digital currency and real-world fiat, are expected to implement the same AML controls and monitoring requirements as stipulated by both the Bank Secrecy Act and Money Laundering Act. This essentially puts pressure on intermediaries to carry out enhanced CDD and know your customer (KYC) controls, to ensure they understand who their customer is, and that the funds have been obtained legitimately.

However, the UK’s approach to regulation is still in its infancy, with HM Treasury (2016) advising that the government plans to include money exchangers within the remit of its AML regulations, however, it remains to be seen when this will be executed. Nevertheless, this still does not solve the issue of identifying where unregulated entities are located. Unless an international collaborative approach is utilised, law enforcement agencies will be limited in their attempt to enforce breaches of AML and social responsibility obligations.

Ultimately, due to the transparency of the blockchain framework, agencies could apply blockchain forensics in an attempt to identify owners or administrators of unregulated entities, much like in the case of infamous Silk Road creator Ross Ulbricht.

Kane Pepi is a recent graduate of the University of Central Lancashire, earning a Master's Degree in Financial Investigation. Kane's research interests include money laundering offences and legislation, judicial powers available to financial investigators and private sector AML compliance. Due to enrol onto a PhD programme researching the money laundering threats within the virtual economy, Kane is using his academic background within the financial crime arena to contribute content on a variety of issues.

If you would like to take part in the ICA’s Big Compliance Conversation and contribute to a likeminded community, please get in touch atcontributions@int-comp.org

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